PCS: Get Out Before Vote, Says Oppenheimer, Sweeter Deal Priced In

By Tiernan Ray

As MetroPCS (PCS) rumbles toward a special shareholder vote this Friday over whether to consummate the proposed $33 billion recapitalization with Deutsche Telekom‘s (DTEGY) T-Mobile USA unit, amidst objections from some holders of PCS stock, Oppenheimer & Co.’s Tim Horan reiterated an Underperform rating on PCS stock, advising the vote will most likely reject the deal.

Writes Horan, “T-Mobile could potentially improve the bid by 10% or so through a number of ways, but we don’t expect that until after the vote, and while we believe there is a 75% chance of this, it is largely baked into PCS’s stock price.”

“PCS’s current price of $11.22 reflects its stake in NewCo plus the $4.06 cash
compensation; we think the market is already pricing in a 12% increase in the offer price vs. our estimate of $10 using a 5x 2013E EBITDA multiple.”

With the pre-paid cellular market “under pressure” as a result of “saturation,” with lots of mobile virtual network operators, or MVNOs, Horan thinks PCS is going to be faced with a lot of spending to try to achieve economies of scale that will keep it competitive:

Over the longer term PCS has limited capacity and will need to spend an additional $1.5B in spectrum and would have to spend another $1-2B after that on the build-out. This would take PCS’s standalone EV to ~$10B with a 7x multiple. ISS has argued that the $1.5B spectrum purchase estimate should not be deducted for valuation purposes as it would add to the overall value of the company. While true, this would only be relevant if T-Mobile were to later be acquired by Sprint. In any case, on a standalone basis spectrum is only a means to an end (i.e., EBITDA and FCF growth).

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APRIL 9, 2013 11:51 P.M.

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About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.